Gross worker and job flows in Europe

Abstract

Despite the impression of Eurosclerosis, labor markets in Europe are in fact quite active. Flows into and out of unemployment are large, countercyclical, and highly coherent in four European countries examined. Worker exits from unemployment to employment exhibit a countercyclical pattern similar to that in the United States and Japan. The matching function paradigm is capable of explaining these facts only if the unemployment stock rises sufficiently fast in downturns. We propose an equilibrium model which can deliver a wide range of job and worker flow dynamics. For sufficiently large adverse shocks, the model can generate endogenous layoffs and job destruction which match the stylized facts.